The Exposure Draft Superannuation Legislation Amendment (MySuper Core Provisions) Bill 2011 was released today. The draft Bill sets out the key MySuper rules which will be included in the Superannuation Industry (Supervision) Act 1993. We can expect more detail in the regulations and prudential standards. Additional trustee duties may also be contained in further tranches of draft legislation.
Following last week’s Information Pack on Stronger Super, the draft Bill is broadly consistent with what was anticipated by the industry. However, there are some unexpected issues which need to be considered - some of these come from structure, most from drafting.
The provisions build around the commencement of the regime on 1 July 2013.
The draft Bill is broadly divided into the following key areas:
Conditions for MySuper authorisation and multiple MySuper products
An RSE licensee must apply to APRA to obtain an authorisation to offer a “class of beneficial interest in a .. fund as a MySuper product”. The application must be in an approved form and be accompanied by the fund’s governing rules.
APRA must authorise an RSE licensee to offer such a class of beneficial interest if the application complies with these conditions and APRA has not already authorised the RSE licensee to offer such a class of beneficial interest in the fund and APRA is satisfied that the RSE licensee is likely to comply with the enhanced trustee obligations for MySuper products, among other things.
This means that an RSE licensee will only be able to offer a single MySuper product in each fund subject to two exceptions.
The first exception should apply to successor fund transfers but depends upon APRA being satisfied that there is “material goodwill” in the “class of interest in the original fund” and that it would be in the “best interests of members” to maintain different MySuper products. These concepts and APRA’s approval raise very difficult issues.
The second exception applies to employer-sponsor plans with over 500 members who are employees of the employer-sponsor (and its associates).
Rules for MySuper products
The governing rules of a fund offering a class of beneficial interest as a MySuper product must comply with ten rules. These rules are consistent with what has previously been announced. However, again, the drafting does raise some interesting issues. The rules must provide for:
- a single diversified investment strategy;
- all members of the class must be able to access the same options, benefits and facilities (this will prevent tailoring of insurance);
- amounts must be credited to accounts of members “in a way that does not stream income from any assets of the fund” except to the extent that a lifecycle strategy is adopted, in which case, income may be “streamed” but only on the basis of age;
- members’ accounts must be credited and debited using the same process except to the extent necessary to allow for fee subsidisation by employers;
- if fee subsidisation is permitted, it must be applied uniformly to all members who are employees of the sponsoring employer;
- no limitations are imposed on the source of contributions;
- no limitations are imposed on the kinds of contributions;
- a MySuper member’s interest cannot be replaced with another kind of interest in the fund unless the interest is also a MySuper interest in the fund or the member has consented to the transfer;
- a MySuper member’s interest cannot be replaced with another kind of interest in another fund unless the interest is also a MySuper interest in the other fund, the replacement is otherwise permitted by law or the member consents; and
- a pension cannot be paid from a MySuper interest.
Fee rules for MySuper products
MySuper trustees may only charge: an administration fee, an investment fee (including performance fee); a buy-sell spread, a switching fee, an exit fee and an activity fee. Other than the administration fee and investment fee, the fees can only be cost recovery fees. Each is defined and so, an “administration fee” is a fee that relates directly to the administration of the fund and an “investment fee” is a fee that relates directly to the investment of the assets of the fund.
All members of the MySuper product must be charged the same flat fee and have the same percentage based fee applied to their accounts.
Trustees will be able to enter into arrangements with employer sponsors to charge a lower administration fee for employees of the employer-sponsor in a MySuper product.
There are other provisions dealing with cancelling of MySuper authorisations and transitional provisions. There are also some amendments to the Superannuation Guarantee (Administration) Act 1992.
Legal hot spots
At a glance, we can see a number of points that could potentially raise legal issues over time. They may well be targets for clarification during the period for making submissions. Our list of hot spots includes:
- a MySuper product is a “class of beneficial interest” in a fund: it may be that this term will not, or even should not, change. Even so, the concept has years of judicial consideration behind it in trust and property law. The drafting of a MySuper product will need to reflect this;
- a “best interests” test overseen by APRA: one of the matters for which APRA must be satisfied in allowing more than one MySuper product in a fund through a transfer, is that having more than one MySuper product is in the “best interests” of existing and transferring members. The meaning of “best interests” in section 52 of the SIS Act has been recently tested through the courts and APRA’s view was apparently not endorsed. It is a fertile field for extensive discussion and debate;
- “material goodwill” in the “class of interest in the [transferring] fund”: this terminology conjures up all manner of queries. Whose goodwill? Is it goodwill that the suggested person is entitled to have? What is “goodwill”?, a concept that the High Court spent considerable time analysing in the last decade or so;
- streaming of income: the lifecycle exception for the single investment strategy is described as streaming of income from different classes of asset of a fund. This concept engages the thorny issue of what is a “fund”, a concept that has been judicially considered in the last ten years;
- “investment fee”: apart from this fee covering costs not otherwise covered, it can only be a fee for the exercise of “care and prudence” in the investment of assets. The clear legislative connection between the fee and legal responsibility for investing needs to be carefully considered in the drafting of trust provisions, investment management agreements and any other investment arrangements for MySuper products;
- fee exemption and transitional rules: careful attention will no doubt follow in relation to the administration fee exemption for employees of an employer sponsor and the transitional provisions leading up to 1 July 2013;
- pensions: It seems that MySuper products will not be allowed to pay pensions as opposed to merely not being required to provide a post retirement product.